Investment

When I tell people that I am an investor coach/fiduciary adviser. The typically response is to try and hide from me or simply walk away. These responses are the result of the stock market volatility during the last couple of years. The stock markets around the world have been extremely volatile.

Huge moves down followed by moves up followed by moves down again and then up again. This volatility has investors on edge and looking for safety. And who can blame them. In most cases we are talking about their life savings.

These ‘investors’ are focused on short term results without regard to the long term potential. All investors need to keep in mind that they will hopefully be retired for a long time. Therefore the short term volatility is really meaningless to them. Or at least it should be.

This is where the guidance of an investor coach/fiduciary brings the most benefit to investors.

By coaching their clients about how the equity markets actually work. For example there is solid evidence that over the long term equity markets are one of the greatest wealth creation tools on the planet.

With this knowledge and the discipline to stay the course investors can realize these great returns.

You don’t have to know everything about the equity markets but you do need to know the right things.

Although I don’t agree with most of Warren Buffet’s methods. That is he believes in picking stocks.

What I do agree with is that he has a process and discipline.

Most if not all investors do not have the emotional strength to remain disciplined during equity market extremes. Both up and down.

There is also a quote by the same Warren Buffet that might help some here. When everyone is crying I’m buying and when everyone is yelling I’m selling. Apparently this only hold true for his buy side. Because he also says his holding period is ‘forever’.

This sounds like market timing, which I do not believe works. That is getting in and out of the market at the right time.

I believe Mr. Buffet’s real point is do not listen to short term volatility. Stay focused on the long term.

If you can find an investor coach/fiduciary adviser to help you. You can stop fearing the markets. You can realize the great long term results. The results that can lead to your successful retirement. Both up to and after your leaving the workforce.

Your coach will among other things teach you the three simple rules of successful investing.

Own equities and high quality short duration fixed income

Globally diversify

Rebalance

These three rules may seem simple but they are very difficult to follow without an investor coach/fiduciary adviser. Especially when the media is ‘scaring’ the hell out of you.

Many of us hear our friends bragging about winning at the casino. But we never hear about the visits to the casino that result in losses. After you hear them brag about their winnings do you ask them to gamble for you, thinking they will repeat? Of course not, because you know it was only a matter of luck and in the long run the only ones to win are the casinos. Investing for your financial future must/should not use the strategy of looking for the hot fund managers expecting them to repeat.

Most mutual fund companies know many, if not most of their managers will produce below market returns and only a handful will beat the market through random luck. So what do they do with the funds that fail? They make them disappear by closing them or merging them with more successful funds. The lucky funds that survive are paraded out in marketing campaigns to lure more investors into the trap. Academics call this Survivor Bias.

The media makes us believe that there are some fund managers who can beat the market consistently. Unfortunately this is not the case for most.

There is also the case of advisers building portfolios concentrated in the ‘hot’ asset class.

Right now the U.S. Large cap equity market is outperforming the international and small market by a significant amount. Will this continue? Eventually this will not be the case. However I have no idea when this change will occur. No one does.

When these ‘hot’ asset classes eventually turn down Investors are bewildered. Because they believed they had found the great adviser that would always earn superior returns..

What ensues is what I call musical brokers. Investors drop the poor performer and seek out the ‘hot’ adviser. This is not investing but rather gambling and speculating.

Remember a globally diversified portfolio will at times under perform a concentrated portfolio. But over time the globally diversified portfolio will prevail and earn great returns.

Unless of course you or someone you know is able to predict the future.

Given that this is impossible to consistently do.

If you are investing for retirement, both leading to and in retirement. You need to know your expected risk (volatility) and expected return. With this information you can plan an income stream that meets your current needs. As well as grow to accommodate for the effects of inflation.

Far too many investors are looking to maximize return to spend more. This will lead to very disappointing results.

Stop worrying whether you are invested in the right things.

Rather your strategy should be backed by academic research.

By including components in your strategy which have earned the Nobel Prize in economics in your long term goals will be met.

To succeed long term in investing you must own equities….globally diversify….rebalance.

When assets are moved in the portfolio, based on a forecast or prediction about the future, this is market timing. For example, you’ve become convinced by economic forecasts that the market is heading down over the next twelve months.

You decide to sell your stocks and put all of the money into cash. That is market timing!

Market movements are random. No one knows what the market will do tomorrow or over the next twelve months. It bears saying again:

Nobody knows with any degree of certainty what the future will bring and if they did they wouldn’t tell you. They would just invest their own money for a ‘HUGE’ profit. The reason they don’t do this is because they have no idea what direction the markets will move in the short term.

These charlatans need you to move your money and they will collect fees. Don’t forget Wall Street doesn’t make money picking the right investments they make commissions/fees on every trade you make. Therefore they need you to believe their predictions.

They need you to believe that someone can tell them what to do ‘right now’ to earn a profit. What they don’t tell you is that the markets are random and unpredictable.

Let’s look at another example. Because of a war, you or your stockbroker predict that international stocks are going to lose big, so you move all of your stocks into the United States. Once again, this is market timing.

This doesn’t “feel” like speculating. It often feels like wise stewardship of your assets. But in reality it is speculating with your money.

If over the last two years, you have watched your portfolio take large losses in any one asset category, and every news program, investing magazine and stockbroker says this is the time to get out – it feels like prudent investing. Nothing could be further from the truth.

In most cases, if not all, staying disciplined and staying the course is the best thing to do. That assumes that you currently have a prudent mix of assets. This is a huge assumption, because most people don’t.

While talking with many investors, both current and potential clients, I have repeatedly heard that stocks are no longer a good investment nor is it the best investment right now. The current volatility will remain, perhaps permanently, making stock ownership far too uncomfortable.

An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

Many of the financial publications are predicting poor returns going forward. Perhaps, they say, this may lead to the ‘death of equities’.

Each time these publications have a solution for your investment dollars.

Perhaps, it is gold or treasury bills or private equity or hedge funds or real estate or cash or the next great money manager or a trading strategy or on and on. Even more prevalent is putting your investment dollars in an insurance product.

These products promise a ‘guaranteed’ return. You are promised ‘you will never lose money’. Keep in mind if equities do ‘die’ insurance companies will soon follow. Insurance companies make money at your expense.

After some research I found an article in BusinessWeek from August 1979 titled the “Death of Equities”. Below are a few excerpts from this article. This article seems eerily similar to the current financial media.

BusinessWeek, 1979:“This ‘death of equity’ can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than ten years through market rallies, business cycles, recession, recoveries, and booms.”

“Individuals who are not gobbling up hard assets are flocking to money market funds to nail down high rates, or into municipal bonds to escape heavy taxes on inflated incomes.”

“Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack.”

We have entered a new financial age. The old rules no longer apply.” —Quotation attributed to Alan B. Coleman, dean of business school, Southern Methodist University

“Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared.”

Many investors might look at this article and determine that stock investing was no longer for them. Keep in mind, 1982 marked the beginning of the greatest bull market in U.S. history.

Will this be repeated? I have no idea. However, I do know that NO ONE can consistently predict the future.

The financial media continually makes new predictions, hoping the readers have short memories.

I believe that if you develop a globally diversified portfolio and remain disciplined to this strategy for the long term you will succeed.

Those that profess their ability to time the market or pick the right stocks are fooling you and themselves. Keep in mind that there are two groups regarding predicting market/stock movements, those who don’t know where the market is going and those who don’t know they don’t know where the market is going.

To succeed in investing for the long term you need to own equities….globally diversify….rebalance.

Ideally, we should all just time the market cycles and only buy when the market is low and sell when the market is high. Unfortunately, investors are unable to do this with any consistency. Whether professional or amateur.

We tend to make our investment decisions based on recent past events and how we feel about those events.

080809_Kodak_Tower_Top (Photo credit: Wikipedia)

If the market has done well lately, we wish, we are comfortable buying stocks. If the market has done poorly, however, (like we are seeing now) we avoid them. Unfortunately, this is the exact opposite of what we should do if our goal is to maximize our long term return. Once we feel “comfortable” with the market, we have usually already passed up large potential gains.

Stocks are the only thing people will not buy at a discount.

The stock market is forward looking and usually starts trending upwards between 6 to 9 months ahead of the economy actually recovering from a down cycle.

Remember, Warren Buffet is a buyer and NOT a seller.

There is an unholy alliance between the media and the large financial institutions to convince the investing public to continue trading by spreading fear and panic. The large financial institutions make money when you trade in and out, making money on every trade. The media encourages sensationalism because it sells advertising.

You should own equities…globally diversify…rebalance and believe that America and the capital markets will recover. We as a country have been thru much worse and we recovered and became stronger.

Not all sectors of the economy will recover or come back to where they were prior to 2008. Other sectors will recover quickly and new sectors will emerge and thrive. The problem is no one can consistently predict what will happen and when.

The world as well as the equity markets are constantly evolving. Things never stay the same. At one time, Xerox was a great company with great innovative products. Now they are almost irrelevant. Or Kodak, or Blockbuster, or the ‘Buggy Whip’. There are technology advances everyday which replace products that were once considered irreplaceable.

Out with the old and in with the new.

No one can predict when any product will be replaced. Or when any company will become irrelevant. No one can predict the future with any degree of consistency.

Nearly all investors require the assistance of an investor coach/fiduciary adviser to guide (coach) them thru the down markets. As well as keep them in check during strong up markets in any specific asset class. Your coach will provide you with the discipline to keep your eye on the long term.

Your coach will help you avoid making decisions based on your emotional response to short term volatility.

Your coach will help you build a prudent portfolio designed for YOU. Your portfolio will have a level of risk you are comfortable with.

Your beliefs have been formed by the financial media hype and fear. They lead you to believe there is someone who can predict the future. They lead you to believe that someone out there can determine the direction of the market. They know investors are looking for an answer.

These ‘someones’ don’t know what they don’t know. Or even more likely they know they cannot predict the market direction. However, in order to sell their ‘solution’ they must convince you that they can in fact predict the future.

As I have said many times in the past. The equity markets in the U.S. and around the world are random and unpredictable.

All the available information is already in the price of the security. This is evidence of an efficient market. Dr. Eugene Fama won the Nobel Prize in economics for 2013. His winning theory is called the Efficient Market Hypothesis which he wrote in 1965. Think of that it took nearly 50 years to prove he was correct. Truly a man ahead of his time.

So the choice is yours do you believe in the financial media hype AND fear or do you believe that the equity markets are efficient? Do you believe there is an expert who can tell you what will go up and what will go down? Or do you believe the markets are random and unpredictable?

I believe the later to be true so I invest accordingly. I ignore short term volatility and focus on the long term. Like an investor should.

If you focus on the short volatility and invest on that premise you are essentially a gambler or speculator.

Over the long term investing will reward you with great market returns without the stress and anxiety.

If you focus on the short term you must stay connected to the market news daily. And even sometimes minute by minute.

To me this is no way to live a happy life.

To reach your financial destiny you must own equities…globally diversify…rebalance.

The nightly news, daily stock market shows, and cable news focus on variability to get your attention. They bombard you with the equivalent of “noise”. Short-run data and statistics that are useless. Paying attention to the short-term market fluctuations and newspaper headlines will completely disintegrate your peace of mind and ultimately your portfolio.

Today Greece is again in the news. They will be unable to meet their financial obligations. The equity markets around the world, with a few exceptions, have responded with downturns. Without becoming too political here is a quote from Margaret Thatcher, past Prime Minister of England.

“The problem with socialism is that eventually you run out of other people’s money.”

This is another example of short term volatility. As I mentioned earlier Wall Street and equity markets around the world do not like uncertainty.

Many will use this as a reason not to invest their money in the equity markets.

This is the reason many prefer investing in real estate because there are no noticeable short-term fluctuations in price. You cannot look up the value of your real estate property on a daily basis. You treat it like a long term investment, which it is. Keep in mind the value of your real estate fluctuates just like the equity markets. The difference is you never see the volatility.

The stock market should be treated much the same, by ignoring short term volatility and the daily news reports. By following a prudent process and strategy with your investments you will succeed in the long run. Stop trying to control something you cannot control.

To succeed in investing for the long run you must own equities….globally diversify…..rebalance.

This is best accomplished with the guidance of an investor coach/fiduciary adviser. Your coach will help you build YOUR prudent portfolio. Followed by ongoing education and coaching.

Investors left on their own will make emotional decisions. Selling during times of down markets, ie, panicking. Your coach will help you remain disciplined to your strategy.

Patience and discipline are your friends when you are investing for your financial future.

Someone may offer you what appears to be a very cheap portfolio. But without the help of an investor coach you will succumb to your emotions and make bad decisions with your money. Whether it is Greece or some other crisis.

Stock pickers and day-traders who are actively trading their investments have perceived control over their portfolio. Similarly, people who jump in or out of the market during up or down swings also mistake their activity for control.

In reality, the more activity and trading you generate in a portfolio, the more out of control the portfolio becomes. When an investor trades in their portfolio trying to time the market or find the “best” investment they are doing nothing but add costs and decrease return.

Actively trading your account by picking individual stocks or market timing or picking funds based on past performance is exactly what the Wall Street bullies want you to do.

Stop empowering the Wall Street bullies.

Just because a fund manager or stock picker or market forecaster was right in the past has nothing to do with future performance. Many investors look at past performance as the result of a skillful trader/manager. This has been proven to be incorrect. Because there is no correlation between past performance and future results.

All managers are required to state this somewhere in their literature. Unfortunately for investors it is hidden in the small print or the investor ignores because the salesperson said ‘this time is different’. They might say ‘this is a once in a lifetime opportunity’ or ‘this is a ground floor opportunity’.

Remember, no one can predict the future, no matter how convincing someone is in the media, they are only guessing. In most cases the predictions are never broadcast by the same ‘experts’. The main reason for this is that the ‘hot’ manager right now got there based on luck and not skill. As we all know luck changes. And so do the ‘hot’ managers we see in the media.

The “best” strategy is to have a prudent process and discipline in place Stop trying to study the market to find bargains, statistics prove that it cannot be consistently done. You might get lucky in the short term but long term your results will suffer.

With the case of market timing, getting in and out of the market at the right time requires being right when you get out of the market AND be right when you re-enter the market. This again will result in lower returns.

To succeed long term and reach your financial goals you should own equities…globally diversify …rebalance.

It may seem easy to develop a prudent portfolio and remain disciplined but research has proven otherwise. People are emotional beings and will be swayed by short term volatility and trade out of the poor performers and buy the hot performers. I don’t know about you but buying high and selling low is not a recipe for success.

This tactic will result in poor results and anxiety. Investors need the assistance of an investor coach/fiduciary adviser to keep them disciplined in both up and down markets.

If your broker/agent takes your order and does whatever you ask. You don’t need an adviser. But if you are looking for advice and someone to help you through the maze of investments. You need an investor coach/fiduciary adviser.

You can never overcome your own humanity. As much as we would prefer to think that we make investment decisions based purely on logic, advertiser and journalists are well aware that emotion ultimately drives most investment decisions.

As a quick demonstration, consider the statements below. See if you can match each statement with the emotion being expressed. (Answers listed in the key below.)

Greed….Regret….Trust…Loyalty…Envy

“It doesn’t matter how sophisticated his charts are or how much sense he makes, I just don’t feel comfortable letting him handle my money.”

“I’m not sure I should have put my money in that fund. It lost 15% already. Maybe I’ll sell some of it tomorrow.”

“My boss got 25% on his money. I only made 8%! I wish I got 25%.”

“I’d wish I’d known that stock was going up, I would have bought more shares.”

“My dad worked in that company all of his life and he left his shares to me in his will. It would be wrong to sell it just to diversify my portfolio.”

Answer key: 1. Trust 2. Regret 3. Envy 4. greed 5. Loyalty

We as people are naturally predisposed toward or against specific investing tactics. What is interesting is that no matter what our emotional tendency maybe, we can almost always find what looks like purely factual data to support our view. It is easy to overweight information that validates our perspective while minimizing any information that goes against what we inherently believe.

The Good News: Simple awareness of your emotions when it comes to financial and investing matters can make the difference between good and bad investment decisions. The recent up and now down markets have many investors on edge, asking….should I get out of the market for good?

Along with the six year old bull market have investors on edge.

This is really what the financial institutions want…they make money when money moves.

Here is a great example of why investors need an investor coach/fiduciary adviser. Your coach will help you build a prudent portfolio designed for you AND keep you disciplined to that strategy in both up and down markets.

As an investor you must remain disciplined to your strategy…you must own equities…globally diversify…..rebalance.

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.

The New York Stock Exchange, the world’s largest stock exchange by market capitalization (Photo credit: Wikipedia)

There are an increasingly amount of ‘experts’ extolling the underperformance of international and small equities for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution. These ‘experts’ are using 2014 as a sales gimmick. You will hear ‘look I would not have as much small stocks’ or ‘international stocks will under perform for some time to come’. Or both.

True investors are much better served using a passive management strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success. It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’. ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.

When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.

In his 1993 letter to shareholders of Berkshire Hathaway, Warren Buffet counseled; “By periodically investing in a ‘passive’ fund….the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” He repeated the advice 10 years later in the 2003 letter. Mr. Buffet, in my opinion, was saying that trying to stock pick, market time and track record investing was ‘dumb’.

To be successful, investors, no matter how large, would be far better off using a passive strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory.

Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work. Most importantly we must believe in our strategy and remain disciplined.